Fourteen of the 25 multinational companies responding to a Pensions & Investments survey coordinate or administer their worldwide pension operations to some degree from a single office or are considering doing so.
Among the companies already providing pension fund direction from a central office are Texaco Inc., Digital Equipment Corp., Chevron Corp., DuPont and TRW Inc. Those who said they were considering such a plan include General Electric Investment Co., Texas Instruments Inc., Minnesota Mining and Manufacturing Co. and Ford Motor Co. (Some global coordination has recently begun at Ford. See P&Oct. 2).
Combined world pension assets of the 14 companies involved in, or considering, this practice weigh in at more than $131 billion.
However, asset size evidently is not key in determining whether a company will institute central pension coordination. While respondents with some of the largest amounts of pension assets - such as General Electric and Ford, with $38 billion and $33 billion in world pension assets, respectively - are looking into central coordination, the Royal Dutch Shell Group of Cos., with $27 billion of world pension assets, reported it is not.
Of those that are interested in, or are pursuing the practice, 13 out of 14 said they want to use it for setting centralized policies on asset allocation and money manager selection; 12 of the 14 such companies also expect it to apply to choosing a custodian. Additionally, four respondents use it or expect to, for internal staff management and five companies use it for additional activities, typically in the accounting and actuarial area.
Asked if the company expected to create a global pension plan for the entire company, most respondents said no. However, the concept is a possibility for Cleveland's TRW Investment Management Co., which manages the worldwide pension assets of TRW Inc. And although GE Investments, Stamford, Conn., responded "no," the firm did add "we do envision a common investment fund in key countries." GE Investments is the investment management arm of the General Electric Co.
The data help quantify multinationals' growing interest in coordinating world pension operations. Consultants cite such incentives as companies' desire to cut overall costs, enhance investment returns, establish more uniform practices and institute better risk management.
At the same time as some companies have extended their global reach, the opportunity to coordinate pension programs worldwide has increased. The growth of private pension systems around the world has expanded the number of countries offering tax-advantaged plans. At the same time, larger service providers in fields such as consulting, custody and investment management have opened offices in multiple locations around the world. This practice allows companies to consider using some of the same service providers for more than one pension fund.
How well does central coordination work?
"Without a doubt, it's been beneficial" for TRW Investment Management, said Robert Hamje, its president and chief investment officer. While "lowered costs was a nice outcome, it was not the (main) driver. We were really after better control of how our assets were being managed on a worldwide basis," he said. In achieving that goal, the firm also was able to enhance investment returns "because of better control and producers," he said.
At his organization, global coordination of pension assets - in the three applicable countries of the United States, United Kingdom and Canada - began in 1990. In the United Kingdom, the firm has multiple subsidiaries, each of which had their own plans and management styles. TRW combined its U.K. pension assets into one investment pool and was able to reduce the number of its money managers to three from six. Consolidation moves included getting one custodian for the U.K. and U.S. funds. In Canada, TRW also was able to reduce the number of managers to two. (Mr. Hamje didn't have the figure on the original number.)
Starting in 1990, the main office in Cleveland also began setting investment standards for managers - but not asset allocation in individual countries - within each non-U.S. market. In the United States, the practice of setting standards for managers had begun earlier.
About a year ago, Wilmington, Del.-based DuPont initiated a sweeping program to coordinate its pension fund investment practices worldwide from Wilmington (P&, Nov. 13).
In DuPont's case, company officials decided to create global pension coordination from Wilmington in financing methods, funding practices, actuarial practices, investment management policies and accounting practices.
Of course, multinationals may encounter problems as they attempt to "coordinate" their pension practices worldwide. Issues can range from employees' concerns about investment decisions made from the home office to local legal impediments to change. And for some companies, such as Bechtel Power Corp., San Francisco, the process doesn't seem to fit.
Most of Bechtel's retirement programs are defined contribution - a structure that uses local "employee input" more so than defined benefit arrangements typically do, said Peter Landini, senior vice president of Fremont Investment Advisors, San Francisco. (However, in some countries, pension fund boards must include both employee and employer representatives.) Therefore, employees in one country might become "upset if a lot of their" retirement assets "were invested, (say), in the U.S., and that market didn't do well," he noted.
P&I received survey responses from 23 U.S.-based multinationals and the U.S. offices of two foreign companies, the Royal Dutch Shell Group of Companies and Nestle SA.